In the United States, exchange-trading of options has existed in a standardized, regulated marketplace since the 1970's. An option is essentially a contract giving a buyer the right, but not the obligation, to buy or sell shares of an underlying security at a specific price for a specific time. Since the 1970's a number of exchanges have been formed, including the Chicago Board Options Exchange (the “CBOE”), the American Stock Exchange (the “AMEX”), the Pacific Stock Exchange (the “PCSE”), the International Securities Exchange (the “ISE”), and the Philadelphia Stock Exchange (the “PHLX”). In general terms, four specifications describe an options contract: the type of the option (e.g., a put or a call), the premium (or the initial amount paid on the contract), the underlying security (or the security, such as an equity, which must be delivered or purchased if the option is exercised), and a contract expiration date.
Unlike other exchange-traded securities, which can generally be traded on equal terms at any exchange, many options trade differently at different exchanges. The variations can include differences in price, execution time, liquidity, etc. For example, an option whose underlying security is IBM, Corp. stock may be traded on several exchanges, however, there may be slightly different order pricing and execution characteristics associated with trades at different exchanges. IBM options at the ISE, for example, may be trading at the National Best Bid and Offer (“NBBO”—a dynamically updated price which shows a security's highest bid and lowest offer among all exchanges and market makers registered to trade in that security), while IBM options at the AMEX may be slightly higher than the NBBO.
Currently, an entity desiring to execute an options trade in the U.S. submits an option order to a broker. The broker transmits the order to one of the five above-identified options exchanges for completion. The broker generally chooses to submit the order to a particular specialist or trading desk at a particular exchange with which the broker has a prior relationship. Unfortunately, the exchange to which the order is submitted may not have NBBO pricing or it may not have the best NBBO pricing. Further, the exchange may not have good liquidity with the particular option involved in the order. As a result, the entity which submitted the trade request may not receive the best execution of the trade that he may have if the broker had transmitted the order to a different exchange. It would be desirable to provide an options system which addresses deficiencies associated with existing option systems.